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John Hussman: The Endgame Is Forced Liquidation

April 22, 2013

“The stock market isn't the only thing that has set records this spring. Barron's semiannual Big Money poll of professional investors also is setting a record -- for bullishness, that is. In our latest survey, 74% of money managers identify themselves as bullish or very bullish about the prospects for U.S. stocks -- an all-time high for Big Money, going back more than 20 years.” “Dow 16000!” – Barron’s Magazine Big Money Poll 4/20/2013

A few reminders…

“Still Bullish! (Dow 13000)” – Barron’s Magazine Big Money Poll, May 1, 2000

The May 2000 Big Money Poll was published with the Dow Jones Industrial Average at 10733.91. The Dow had already peaked nearly a thousand points higher in January of 2000, and would go on to lose about 40% of its value in the 2000-2002 bear market, with the S&P 500 and Nasdaq faring far worse.

“Dow 14000?” – Barron’s Magazine Big Money Poll, May 2, 2007

The May 2007 Big Money Poll was published with the Dow at 13264.62. The Dow did advance another 6% to reach 14000 by October 2007. By November (the poll is semi-annual), bulls were outnumbering bears by 2-to-1, and the headline ran “The Party’s Not Over.” In fact, the market had already peaked, and proceeded to lose over half its value in the 2007-2009 bear market.


Rule o’ Thumb: When the cover of a major financial magazine features a cartoon of a bull leaping through the air on a pogo stick, it’s probably about time to cash in the chips.


While the attention of investors is focused on the short-run market outlook in what is already a mature bull market advance, it’s crucial to understand the endgame to this overvalued, overbought, overbullish, overleveraged episode of market history. That endgame will be forced liquidation, as declining prices force leveraged investors to sell – voluntarily or otherwise. I noted back in January that margin debt had surged above 2% of GDP for the fourth time in history (the other three being 2000, 2007, and February 2011 - less severe, but still followed by an 18% market correction). In February, NYSE margin debt (the amount that investors have borrowed to purchase NYSE-traded stocks on margin) reached $366 billion, and there’s a fair chance that given the continuation of that advance in the subsequent weeks, more recent margin debt will have accumulated to a total that eclipses the July 2007 record of $381 billion.


Clearly, the dollar value of margin debt has experienced a secular increase over time, so the levels aren’t as important as the cyclical variations. In particular, note that rapid and nearly parabolic increases in leverage tend to appear as the market approaches major peaks and bullishness feeds on itself. There are a number of series that can be used to normalize the long-term uptrend and to put the amount of margin debt in context. Notice that one would not want to normalize using the market value of stocks themselves. The reason is that margin debt surges near market peaks and collapses at market troughs, so to divide by the level of prices at those points would actually destroy much of the information content of margin debt (though you still typically observe debt rising much faster than prices as the market peaks).

Read the complete commentary

Rating: 2.9/5 (18 votes)


LwC - 4 years ago    Report SPAM
Thumbs up to Hussman's comment about Alan Abelson.
Blue Cove Partners
Blue Cove Partners - 4 years ago    Report SPAM
Agree with Clanm
LwC - 4 years ago    Report SPAM
Clanm and Jameshou: GuruFocus has responded to comments like yours. Perhaps you might follow Hussman's practice in one regard - he researches before he comments.

Superguru - 4 years ago    Report SPAM
Hussman has been very bearish last few years while US stock market as doubled.

But he has an intelligent, well researched point of view. Though sometimes I feel he has a point of view and then finds specific facts that supports it.
Vgm - 4 years ago    Report SPAM
Agree with Clanm.
LwC - 4 years ago    Report SPAM
I don't know how it could be more clearly stated in plain english:

"If you want to know why we keep post John Hussman's weekly commentary, please read this:

How Should We Look at John Hussman's Performance Numbers?



So please don't try to tell me that GuruFocus has not explained why they continue to post Hussman's commentaries. If you don't like the commentaries, don't read them.

Vgm - 4 years ago    Report SPAM
"I don't know how it could be more clearly stated in plain [e]nglish:"

LwC -- it may be simply stated, but the analysis was far from definitive. In fact it ends with the question "What do you think?"

You then go on to advise: "If you don't like the commentaries, don't read them."

Who are you to tell others what they should or not read? You seem to want a world of lemmings where no-one is allowed to disagree. Seeking diverse opinion is one of the most powerful attributes of a discussion board. It's healthy. You may (not) know the adage 'When everyone is thinking the same, no-one is thinking.'

Waup7707 - 4 years ago    Report SPAM
It's very difficult to act on macro economic view, even if you are eventually right. No one can foretell the peak and the trough of a market.

"The market can stay irrational longer than you can stay solvent." - John Maynard Keynes

John Paulson speculated on risky CDS to time the burst of housing bubble using other people's money and he won big and became a billionaire. Afterward, he speculated on financial stocks, Europe sovereign debts, and gold based on his macro views. Each one ended in big loss.

A true great investor is very unlikely to underperform the market for long period of time (say 10 year or longer period). I looked into investment results of three gurus Buffett, Watsa, Cumming/Steinberg (Leukdia). Each one of them has had more than 30 year record. Using book value as proxy, I couldn't find any rolling 10 year period that lags S&P 500 index. Actually, they significantly outperform the market for majority of 10 year period. Buffett even hasn't had any 5 year period that lags the market for the entire 48 years that he runs Berkshire.
Phillwilson11 - 4 years ago    Report SPAM
I agree with Hussman in this article. And furthermore, economies all over the world are looking like they are starting to turn over right now. A heavy cash position is not a bad idea.

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